Single-Family Housing:

Cost, Benefit, and Compliance Issues Raise Questions about HUD's Discount Sales Program

GAO-04-208: Published: Jan 30, 2004. Publicly Released: Jan 30, 2004.

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In 2001, the Department of Housing and Urban Development's (HUD) Inspector General reported on serious problems in HUD's Discount Sales Program, under which nonprofit organizations purchase HUD-owned properties at a discount, rehabilitate them, and resell them to low- and moderate-income homebuyers. The objectives of the program are to expand affordable housing opportunities, help revitalize neighborhoods, and reduce HUD's property inventory in a timely, efficient, and cost-effective manner. Although the Inspector General recommended that the agency suspend the program and evaluate its viability, HUD did neither. GAO was asked to assess (1) the costs of the program to HUD, (2) the benefits of the program to homebuyers, and (3) HUD's efforts to monitor participating nonprofits and enforce program requirements.

GAO found that the Discount Sales Program poses significant costs to HUD, is of questionable benefit to homebuyers, and has serious monitoring and compliance problems. GAO estimates that the program cost HUD between $18.8 and $23.9 million in calendar year 2002. Between $15.1 and $20.2 million was a reduction in net revenue resulting from HUD's selling approximately 1,200 properties through the program instead of through its regular sales process. Personnel expenses for administering the program accounted for the remaining $3.7 million. GAO's analysis of 238 properties sold under the program in 2002 suggests that most of the homebuyers did not benefit financially. Assuming that nonprofits and homebuyers would incur the same rehabilitation costs, GAO estimates that 76 percent of the homebuyers would have spent less purchasing the properties through HUD's regular process and paying for the rehabilitation work themselves. And while the program can help homebuyers access a range of homeownership services, these services are also available from other sources. GAO did not evaluate the extent to which the program generated other benefits, such as neighborhood revitalization. While uncovering numerous program violations, HUD's monitoring efforts have faced challenges. For example, HUD monitors nonprofits through desk reviews of the annual reports it requires nonprofits to submit each February. However, as of July 2003, HUD's four homeownership centers, which administer the program, had not received reports for more than half of the properties the agency estimates were purchased and resold under the program in 2002. Even with this problem, the desk reviews found that 28 of the 44 nonprofits that submitted reports violated resale limits, earning an estimated total of $704,720 in excess profits. HUD requires that nonprofits use their excess profits to pay down the mortgages of the homebuyers they overcharged, but the agency's ability to enforce this requirement is extremely limited. As of July 2003, nonprofits had made only $62,000 in payments on mortgages.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: The volume of properties sold under HUD's Discount Sales Program has dropped steeply in recent years, shrinking to less than 1 percent of HUD's total property sales. HUD has indicated that it would not be cost-effective to evaluate the program's costs and benefits and options for improving it given the program's small size. Accordingly, HUD does not plan to implement the recommendation.

    Recommendation: The Secretary of HUD should evaluate options to improve the Discound Housing Program's benefit to homebuyers, the agency's monitoring of nonprofits, and enforcement of excess profits requirements.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Not Implemented

    Comments: The volume of properties sold under HUD's Discount Sales Program has dropped steeply in recent years and in fiscal year 2005 accounted for less than 1 percent of HUD's total property sales. HUD has indicated that it would not be cost-effective to evaluate the program given the program's very small and shrinking size.

    Recommendation: The Secretary of HUD should assess the extent to which the Discount Housing Program is meeting its objectives.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Not Implemented

    Comments: The volume of properties sold under HUD's Discount Sales Program has dropped steeply in recent years, shrinking to less than 1 percent of HUD's total property sales. HUD has indicated that it would not be cost-effective to evaluate the program's costs and benefits and options for improving it given the program's small size. Accordingly, HUD does not plan to implement this recommendation.

    Recommendation: If the Secretary of HUD determines that the current cost of the program plus the resources needed to improve it exceed the program's benefits, the program should be terminated.

    Agency Affected: Department of Housing and Urban Development

 

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